Exemptions for Value Added Taxes Often Overlooked.

Author:Speciale, Stephen

The purpose of this article is simple--to provide a basic understanding of value added tax (VAT) and help stakeholders complete sound exemption processes for the Defense Department's international efforts in foreign countries.

The VAT exemption process, if appropriately implemented and executed, can produce enormous cost savings for the United States. Common knowledge and information are essential since there are numerous stakeholders involved. They include military service members, civilian personnel, industry partners, various U.S. government entities, and various foreign government entities.

VAT is not a new phenomenon as it has existed for decades. It is merely a consumption-based tax charged by foreign countries that serves as a revenue source. The concept is similar to sales taxes charged on purchases of products and services made within the United States. For instance, as of 2019, Hungary's standard VAT rate is 27 percent and the United Arab Emirates' standard VAT rate is 5 percent. Value added tax applies to most purchases made within a foreign country, such as those for equipment, materials, facilities and services. Some foreign countries may also impose the tax on items that entities transport into that foreign country from an outside source.

Understanding the importance of VAT and instances where an exemption is applicable is critical for success. It is increasingly significant as the Defense Department continues and expands efforts with allied nations around the world. The National Security Strategy and the National Defense Strategy repeatedly specify the need for strengthened alliances and increased partnerships to provide for the common defense. Further, total foreign military sales for fiscal year 2018 tallied $55.7 billion--a 33 percent increase from total sales for fiscal year 2017.

As a result, it is reasonable to believe the department's international efforts with foreign countries will continuously increase for years to come. Increased activities will directly impact the amount of U.S. funding spent within foreign countries.

In most cases, the Defense Department and its industry partners can be exempt from paying VAT. Exemption may apply whenever substantive spending occurs on defense-related purchases within a foreign country or when the department or its partners transport items into a foreign country.

Types of efforts can include international deployments, international armaments cooperation, FMS programs and other types of U.S. security assistance. Specific examples are the defense cooperation efforts...

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